Breakeven Analysis and Pricing
Mc Lennon Company has a plant capacity of 100,000 units per year, but its budget for this year indicates that only 60,000 units will be produced and sold. The entire budget for this year is as follows:
| Sales (60,000 units at $4) | $240,000 | |
| Less cost of goods produced (based on | ||
| production of 60,000 units) | ||
| Direct materials (variable) | 60,000 | |
| Direct labor (variable) | 30,000 | |
| Variable over head costs | 45,000 | |
| Fixed overhead costs | 75,000 | |
| Total cost of goods produced | $210,000 | |
| Gross margin | $30,000 | |
| Less selling and administrative expenses | ||
| Selling (fixed) | $24,000 | |
| Administrative (fixed) | $36,000 | |
| Total selling and administrative expenses | 60,000 | |
| Operating income (loss) | ($30,000) |
1. Given the budgeted selling price and cost data, how many units would McLennon have to sell to break even? (Hint: Be sure to consider selling and administrative expenses.)
2. Market research indicates that if Mc Lennon were to drop its selling price to $3.80 per unit, it could sell 100,000 units. Would you recommend the drop in price? What would the new operating income or loss be?
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